One in five U.S. homeowners with mortgages owe more to their lenders than their properties are worth, and the rate will increase as housing values drop in states that have so far avoided the worst of the crisis, a new study shows.
About 8.31 million properties had negative equity at the end of 2008, up 9 percent from 7.63 million at the end of September, according to the study, released Wednesday by First American CoreLogic. The percentage of "underwater" borrowers rose to 20 percent from 18 percent.
Another 2.16 million properties could go underwater if home prices fall another 5 percent, the study shows.
First American said the value of residential properties fell to $19.1 trillion at year-end from $21.5 trillion a year earlier, with half the decline in California. Forty-three U.S. states and Washington, D.C., were included in the study.
While states such as California, Florida and Nevada were particularly stressed, the study showed worrying signs of deterioration in relatively healthy parts of the nation.
"The economic slowdown is broadening," said Sherrill Shaffer, a banking professor at the University of Wyoming at Laramie and a former Federal Reserve official. "As more people lose jobs, it will be more difficult to sustain the levels of pricing and home ownership, and that is a big factor driving down housing prices in more parts of the country."
Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio remained the most stressed states, with 62 percent of underwater borrowers and just 41 percent of mortgages.
Other areas, though, also face more stress. Connecticut, for example, saw a 25 percent increase in homes with negative equity, while Washington, D.C., had a 44 percent increase.
"Even I continue to be surprised at the tentacles of this financial and economic debacle," said Robert MacIntosh, chief economist at Eaton Vance Management in Boston. "More people are being laid off, resulting in reduced income and therefore less consumption. That leaves fewer people with money to buy homes, and the mentality is that people believe they should wait six months rather than buy now. Less demand means falling prices."
Roughly 68 percent of U.S. adults own their own homes, and about two-thirds of these have mortgages. Many economists expect the nation's unemployment rate to rise above 9 percent before the recession ends, up from January's 7.6 percent.
CALIFORNIA, NEVADA UNDER STRESS
California had 1.9 million borrowers with negative equity at year-end, more than any other state, followed by Florida's 1.28 million. About three in 10 borrowers in both states were underwater.
By other measures, Nevada was the most stressed, with 55 percent of owners having negative equity and borrowers on average owing 97 percent of what their homes are worth. About 28 percent owe more than 125 percent of their homes' value.
Michigan had 40 percent of its homeowners underwater, while Arizona had 32 percent.
New York fared best, with just 4.7 percent of borrowers with negative equity and an average 48 percent loan-to-value ratio, though this could change as employment and bonuses slide in the financial services industry.
According to the S&P/Case-Shiller Home Price Indices, prices of U.S. single-family homes slumped 18.5 percent in December from a year earlier, the biggest drop in the 21-year history of the data.
Many lenders are taking steps to keep borrowers out of foreclosure. The Obama administration has backed legislation that could broaden powers of bankruptcy judges to modify mortgages for troubled borrowers. Among major lenders, only Citigroup Inc has supported such a plan.
MacIntosh expects housing prices to keep falling until "well into" 2010. "There is no magic bullet or magic arrow here," he said. "It is a question of trying to come up with ideas and seeing what happens. It could take a long time."
First American CoreLogic is an affiliate of title insurance and real estate services company First American Corp.
Copyright © 2009 Reuters Limited
Technorati Tags: 
Yet again we see a headline which does not coincide with the underlying story. The headline is an implication that one fifth of all mortgagees are behind in their mortgages, while the reality is that one fifth of all homes under mortgage are worth less than the mortgage balance. That's not trouble if the home-owner continues to make monthly payments.
I have to disagree with you. I define owing more than your home is worth as "trouble." You obviously do not. That's your right, but the headline stands.
If my house goes into negative equity and I continue to make my monthly payments how am I in trouble?
If my house has lots of equity and I fail to make my monthly payments am I in trouble? Yes.
There is no correlation. But it's your web site and your headline.
Gazelle and I NEVER agree except for now.
—W—
If the bank decides the difference between the market value and the mortgage is too great, the loan can be recalled. It's probably not likely... given the need to sell it again at the lower market price, but it can be done - and would - in the right circumstances.
Can't imagine the loss should 20% of home owners decide to send in that jingle mail and walk away from the loan. Nevada seems particularly in danger with 28 percent owing more than 125 percent of their homes' value. There is no incentive to stay at that point unless you like paying more than something is worth. Send in the jingle mail, take the credit hit, and pick up something nicer for less money in a few years after all the fall-out subsides. Socially it's irresponsible, but these home owners have to start thinking about their own survival. No one else is going to save them from their bad decisions.
Besides, it's only supposed to get worse, with some predicting housing values will continue to fall, losing as much as 80% of their peak value according to the pessimists.
It is bad here in Ohio. I've seen a number of houses that were on the market last year get removed, only to now be re-added as the market slips further and the bank has taken over the properties. Short sales and foreclosure auctions seem to be the only things moving at any decent rate. And this is in Franklin County, where we are fairly well off due to our insurance and banking market underpinnings. It's much worse in the outlying areas and traditional blue-collar cities like Toledo where my mother and sister live.
According to the Chicago Tribune, the median price of a home in Detroit in Decemeber was $7500.
Chicago Tribune
Scary.
No, the median price of a house SOLD in Detroit was $7,500. Bad as that is, it does not mean that the median price of all homes in Detroit is quite that low.
The situation remains bad. Here in Arizona we have whole cities that have mushroomed out of the desert in the past few years, like the city of Maricopa, where the entire net equity of the city is probably below zero. These cities mushroom out of nowhere constantly. A small town of less than a thousand can become a city of 50,000 in just a few years. Recently created boom cities are in deep trouble since most of the value of the real estate was created in the past few years during the housing bubble. How they will survive is problematic. [edit-add] Arizona has had booms and created ghost towns before... gold, silver, copper... Now we have created the next 'ghost towns' for a decade from now. Come visit! Your tourist dollars will be very welcome.
—W—